INVESTMENTS UPDATE

What Ukraine developments could mean for your investments

  • Shunil Roy-Chaudhuri
  • 22 February 2022
  • 4 mins reading time

UK health minister Sajid Javid has declared that Russia has invaded Ukraine. The UK government has said it will sanction Russia following President Vladimir Putin’s decision to recognise two breakaway regions in eastern Ukraine. And Prime Minister Boris Johnson describes Putin as ‘bent on full-scale invasion’ of Ukraine.

Developments in the Ukraine have the potential to become a human tragedy. But they will also have an impact on global stock markets and on your portfolios.

In today’s febrile environment, investors may be tempted to seek refuge in potentially safer assets, such as government bonds, the US dollar, the Japanese Yen and gold. But Keith Wade, chief economist at Schroders, highlights the possible dangers of such an approach.

He said that simple portfolios of low-risk assets have generally performed more strongly than higher risk portfolios at times of heightened geopolitical risk. But he said that the higher risk assets subsequently bounced back and he believes it is very difficult to correctly time this rebound.

‘You would generally be better off trying to shut your eyes and leaving your portfolio for six months,’ said Wade. ‘In my view, you would then typically be in a stronger financial position than if you had remained in safe assets throughout the period.’

Wade’s view seems borne out by the performance of equities during times of heightened geopolitical risk. The chart below shows the performance of North American equities (in sterling terms) between 1987 and today. It shows the limited impact that the four main geopolitical crises had on North American equities. We have shown the performance of North American equities rather than UK equities, as we are global investors and have larger holdings in North American shares than UK shares.

Source: FactSet, Schroders Personal Wealth, 21 February 2022.

Wade believes that the invasion of Ukraine, and the possible imposition of sanctions against Russia, could help drive up the oil price. And he thinks Europe could potentially be badly impacted by any cutting off of oil and gas supplies from Russia. But he added, ‘Stopping trade with Russia wouldn’t, in my view, have a massive impact on global economies beyond oil and gas. But it may possibly lead the US Federal Reserve to pause interest rate rises for three months or so.’

At Schroders Personal Wealth, we are believers in diversification, of not keeping all your investment eggs in one basket. Holding a diverse range of assets can potentially protect your investments against economic shocks, as different assets respond in different ways to particular economic and geopolitical events. So this could cushion the impact of the Russian invasion on your portfolio.

We believe the best response to the Ukraine situation is to take a long-term view and to stay invested in a blend of high and low-risk assets appropriate to your circumstances.

Even so, we do respond tactically to changing economic and political circumstances. In this regard, we currently have an investment preference for commodities, such as oil, which can potentially offer some protection against inflation and the adverse investment impacts of the Ukraine situation. We are monitoring this situation closely and will provide updates as events develop.

Past performance is not a reliable indicator of future results. The value of investments and the income from them can fall as well as rise and are not guaranteed. 

Important information

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In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

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